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Accident Compensation Cases

Accident Compensation Corporation v Rusher (DC, 30/10/15)

Judgment Text

Judge J H Walker
The respondent Karl Rusher was injured, including head injury and a concussion, on 11 December 2012 when he was thrown out of a tractor/crane when it tipped. He was certified unfit to work from that date. 
At the date of the injury Mr Rusher was a shareholder-employee with Glasshouse Company Limited, a new company incorporated on 12 April 2012. 
Mr Rusher had previously injured his hand on 24 June 2012 (ACC claim 10020689218) and had been off work until 5 August 2012. On 13 December Mr Rusher lodged a further claim following the accident of 11 December 2012. 
On 17 July 2013 Mr Rusher lodged an IRD tax return information for the year ending 31 March 2013 with the Accident Compensation Corporation (“Corporation”) the appellant in these proceedings. 
The Corporation accepted that Mr Rusher was an earner at the time of the incident and proceeded to calculate his entitlement for weekly compensation. 
Mr Rusher's weekly earnings were calculated on the weekly compensation payments received by him for the period 2 July 2012 to 5 August 2012 in the amount of $1,170.18. This resulted in a weekly earnings figure of $187.28 gross per week. He was entitled to the minimum full time rate ($430 gross per week) from 15 January 2013. 
A weekly compensation assessment was issued on 10 October 2013 to this effect. 
An application for review was completed by Mr Rusher and a review hearing conducted on 20 January 2014. 
The reviewer on 10 March 2015 issued a decision quashing the ACC decision and substituting it with a decision that ACC was to recalculate Mr Rusher's weekly compensation: 
“ … Using the formula set out in clause 39(2)(a) with respect to his tax declared salary of $61,000, divided by the number of weeks during which these earnings were earned (30.5 weeks). ”
It was agreed by counsel that although the reviewer's decision referred to “both claims” it is only the claim relating to the injury of 11 December 2012 that this appeal refers to. 
Counsel for Mr Rusher in written submissions, and at the hearing conceded that the reviewer's reasoning may have been incorrect at the review hearing. It was acknowledged that the formula in clause 39(2)(a) of the First Schedule of the Act refers “earnings as an employee”, rather than “earnings as a shareholder-employee”
Counsel accepted the submissions of counsel for the Corporation that the reviewer had adopted the figure of $61,000 under the formula on the basis that this payment was “earnings as an employee”
As counsel for the Corporation had stated in his submissions: 
“There is a fundamental flaw with this argument. These earnings were not ‘earnings as an employee’. At no time did the respondent receive PAYE deducted earnings on the payments. IRD confirmed the same to the Corporation on 9 September 2013 as well as confirming that no PAYE deducted earnings had been paid for the respondent from 1 april 2013 to September 2013 (the 2014 tax year). ”
Counsel for Mr Rusher accordingly advanced, in support of the reviewer's decision being upheld, relied on s 15(5) of the Accident Compensation Act 2001 (“the Act”) read in conjunction with Schedule 1 of the Act. He stated this would lead to the “same outcome (albeit it by a different route) as the previous review decision”
Subsequently effectively abandoning support of the reviewer's decision in respect to the interpretation of Schedule 1, s 39(a) counsel then relied on s 15(3) of the Act. 
Earnings as a shareholder-employee 
Earnings as a shareholder-employee, in relation to a person who is a shareholder-employee and any tax year, means— 
the amount described in subsection (2) (the subsection (2)amount); or 
the amount described in subsection (3) (the subsection (3)amount), if the Corporation decides that the subsection (2) amount is not a reasonable representation of the person's earnings as a shareholder-employee in the tax year. 
The subsection (2)amount is— 
all PAYE income payments of the person for the tax year derived from a company of which the person is a shareholder-employee; and 
all income of the person that is deemed to be income derived otherwise than from PAYE income payments under section RD 3(2) to (4) of the Income Tax Act 2007. 
Thesubsection (3)amount is an amount determined by the Corporation in the following way: 
first, determine each of the following amounts: 
an amount that represents reasonable remuneration for the services that the person provides to the company as an employee of the company in the tax year; and 
an amount that represents reasonable remuneration for the services that the person provides as a director of the company in the tax year; and 
second, add the amounts described in paragraph (a)(i) and (ii), and the result is thesubsection (3)amount. 
The earnings as an employee of the person as an employee of the company are the amount described in subsection (3)(a)(i). 
The director's fees of the person as a director of the company are the amount described in subsection (3)(a)(ii). 
The dividend of the person as a shareholder of the company is determined by the Corporation in the following way: 
first, determine the total amount the company pays or provides to the person in any capacity in the tax year; and 
second, deduct the subsection (3)amount from that total amount, and the result is the dividend of the person as a shareholder of the company and is not earnings of the person. ”
Counsel for Mr Rusher submitted it was important to look at the purpose of the Act and submitted the purpose of the approach is important as there is a big class of claimants i.e. shareholder-employees to which the formula applies being all shareholder-employees who are injured in their first year of business. 
He stated that parliament could not have intended that such a large class of claimants be potentially left out in the cold. He referred to Mr Rusher's vulnerability in the early months of business. 
In respect to the result being fair, I referred Counsel for Mr Rusher to s 190 of the Act which is a provision specifically in the Act for shareholder-employees to purchase weekly compensation from the corporation (I erroneously referred to the section in oral discussion as s 140) as having possible application. 
Counsel responded that it was a grossly underutilised provision which unfortunately was not relevant to this case, but it's something that very few business owners are aware of and very few accountants utilise. 
He submitted that s 15(1) applied to “any tax year” including the year Mr Rusher was injured. At paragraph 28 of his written submissions he states: 
“It is submitted that, by section 15(3) it is clear that Parliament anticipated there will be difficult or unfair situations where the amount derived by formula is not a reasonable representation of the person's earnings as a shareholder-employee in the tax year. In these circumstances ACC may determine any amount that presents reasonable remuneration for the services that the person provided (section 15(3)(a)(i). ”
Further he advanced that s 15 provides a remedy for situations when the application of the statutory formula leads to an unreasonable outcome. 
Counsel states that the best evidence is the Directors' agreement entered into at the time the company was incorporated that Mr Rusher received $2,000 a week payment and also that Mr Rusher's tax return, that ACC had accepted, for the 2013 tax year for the sum of $61,000 for 30.05 weeks worked. 
He confirms at [33] of his submissions: 
“That approach is consistent with clause 31 of Schedule 1 of the Act (ACC's obligation to take tax returns into account when determining earnings), the ratio of Box (supra) and the obiter dicta of the High Court in the case of The Estate of Michael Bartrom v ACC [2010] NZACC 72. In that case, the Court confirmed ACC's ability to assess a figure of ‘reasonable remuneration’ in any given tax year. (Counsel notes that the unsuccessful appellant in that case had historically been a shareholder-employee, unlike Mr Rusher in the present appeal). ”
Counsel submitted at para [35] of his submissions that this appeal is exactly the type of case to which s 15(3) is intended to apply and that the Court has jurisdiction on appeal to consider the substantive merits of the ACC decision and can make any decision the ACC could have made. He stated this included a decision about the application of s 15, and the “reasonable remuneration” figure. 
Corporation's Position 
It is noted Mr Rusher did not dispute he was a shareholder-employee of the Glasshouse Company Limited at the date of the accident and that the figure of $61,000 was: 
“Earnings as a shareholder-employee for the period from the 12th of April 2012 to the 11th of December 2012 declared as income for the year ending the 31st of March 2013. ”
Counsel for the Corporation submitted that s 15 cannot be considered in a vacuum and must be applied in accordance with the provisions and formulae set out in Part 2 of Schedule 1 of the Act, and that this proposition was in line with decisions made by the Courts. 
Counsel set out the key principles to highlight how calculations operate: 
A claimant's weekly compensation is based on 80% of the claimant's ‘weekly earnings’. The weekly earnings are in turn based on a claimant's income received in the period before the incapacity commences. 
A different formula is prescribed for three types of earnings. The three types are: 
Earnings as an employee; 
Earnings as a self-employed person; 
Earnings as a shareholder-employee. 
A claimant who in receipt of ‘earnings as an employee’ has his/her weekly earnings calculated on such earnings in the period immediately prior to the date the incapacity commenced. 
A claimant in receipt of ‘earnings as a self-employed person’ or ‘earnings as a shareholder-employee’ has his/her weekly earnings calculated on such earnings received in the ‘relevant year’. Relevant year is defined under cl 30 as being the recent tax year last ended before the commencement of the period of incapacity. 
In respect to claimants who have received earnings as a self-employed person or shareholder-employee, the Corporation must rely on an income tax return lodged with IRD unless the Corporation is satisfied that the return has been unreasonably influence by the claimant's incapacity; see cl 31. ”
Counsel for the appellant noted when applying these principles to the present situation pursuant to Cl 39(2)(a): 
The respondent was in receipt of earnings as a shareholder-employee at the material time; 
The respondent's ‘relevant year’ was the year ending 31 March 2012 (‘the 2012 income year’). In this income year the respondent received no earnings as a shareholder-employee. ”
It is noted in respect to Mr Rusher's contention he is entitled to use his earnings as a shareholder-employee for the year ending 31 March 2013 to calculate his weekly earnings. 
However the Corporation contends that the formulae under Part 2 of Schedule 1 simply does not permit this. 
Nor does Section 15 permit the Corporation to override the formula under cl 39. 
Counsel for the Corporation also produced section 6 of the Act (which is the interpretation section) that stated “earnings as a shareholder-employee has the meaning set out in section 15”. It was noted there was no reference in s 15 to formulae set out in Schedule 1 of the Act. 
In respect to discretion the Corporation may have pursuant to s 15(3) counsel refers to the decision of Nicholas v ACC1
| X |Footnote: 1
[2008] NZACC 2010 
where the Court held, inter alia: 
Having regard to the entitlement provision of clause 39 and of the requirement that the Corporation must determine earnings by relevance to income tax returns, I find that the purpose of subsection (3) amount contained in the definition of section 15 is there to be applied in tandem with clause 31(b) and only comes into play if the Corporation considers there is a question mark about the correctness of subsection (2) amount. 
of that case noted by Ms Scott [for the Corporation] in her submissions, the appellant has neither paid tax on the income which he now seeks to have considered for the purposes of clause 39, nor has he paid the ACC levy which would be calculated on that income. I find it inconceivable that the legislation would allow for some arbitrary figure to be put up for consideration as being earnings, when these earnings have not been returned for income tax purposes, or have ACC levies paid which are communicative with these earnings. 
I find that clause 31 of Schedule 1 means that the income tax return is for the amount which constitutes shareholder-employee earnings and would only be if that amount returned was in some way ‘loaded’ because of the fact of incapacity that the Corporation can reconsider the amount returned and reallocate part only of the earnings so returned which represent reasonable remuneration for the two aspects of shareholder-employee earnings and which are to be considered under section (2) amount in section 15. ”
It follows that the Court determined that s 15(3) does not come into play unless and Inland Revenue tax return has been rejected by the Corporation under s 31. However, in this present case the Corporation has not rejected Mr Rusher's tax return. 
Counsel for the Corporation also refers to the decision of Bartrom Estate2
| X |Footnote: 2
[2010] NZACC 72 
. This case was also referred to in the written submissions of counsel for Mr Rusher (see para [23]). 
Counsel for the Corporation in his submission disputes this interpretation and states: 
“In Bartrom Estate the High Court confirmed that s 15(3) must be confined to a claimant's ‘relevant year’. Contrary to the respondent's argument, the High Court did not accept that s 15 can be applied to ‘any given tax year’. ”
Counsel for the Corporation continues his discussion of this case paragraphs 20 to 22 of his written submissions: 
In Bartrom Estate the Corporation exercised its discretion under s 15(3). Thus no issue arose before the High Court as to whether (as per Nicholas), it was necessary to show that a tax return had been influenced by incapacity before resorting to s 15(3). 
The issue before the High Court was, inter alia, the extent to which s 15(3) could be applied. In that case, B was a shareholder-employee at the time of his accident and incapacity on 5 December 2002. In terms of the ‘relevant year’ (being the year ending 31 March 2002), B's company had made a profit of $7,402. However, no shareholder-employee earnings were credited to B in that financial year. The Estate argued that s 15(3) ought to be deployed to credit the claimant with earnings received in the following income year; ie the year ending 31 March 2003 (during which the accident and incapacity occurred). The estate also argued that the formula under cl 39(2)(a) applied. 
The High Court determined that in fact the formula under cl 39(2)(c) applied. In terms of using earnings from the year after the relevant year, Allan J held, inter alia: 
I have already concluded thatclause 39(2)(c)applies to the exclusion ofclause 39(2)(a). But, even if the latter clause did apply,s 15(3)would be of no assistance to the appellant. Section 15(3) is concerned with the determination of earnings as a shareholder-employee and enables the Corporation to exercise a discretion by way of allowing a figure as reasonable remuneration for services provided as a shareholder-employee in the tax year concerned. In other words, a shareholder-employee will not necessarily be bound by the company accounts. 
Clause 30(2) of Schedule 1defines the relevant year as being the complete tax year immediately preceding the incapacity. Accordingly, for the purposes ofsection 15(3), the Corporation has a discretion to assess reasonable remuneration for Mr Bartrom's services for ABCL during the year ending 31 March 2002. In that year, the company had a profit of $7,402.38. None of that profit was declared by Mr Bartrom as personal income but the Corporation nevertheless involved section 15(3 in treating the whole of the income as earnings as a shareholder-employee. 
… Section 15 is concerned with the calculation of the earnings of a shareholder-employee (and confers on the Corporation element of discretion for the purposes in section 15(3)(a)). Once that calculation is undertaken, the result must then be brought into the calculation prescribed by clause 39(2)(c). At this later stage there is no discretion; the exercise is simply arthrimetical. Section 15defines and provides a method of determining the relevant earnings as a shareholder-employee.Clause 39(2)then picks up that calculation for the purpose of determining weekly earnings pursuant to the formula prescribed byclause 39(2)(c). The result produces a figure for weekly earnings which is then carried over into the calculation of the ultimate compensation figure. ’”
[counsel's underlining] 
It is noted by Counsel for the Corporation that the High Court in the Bartrom Estate case held that s 15 is to be considered in the context of the provisions and formula under part 2 of Schedule A. In that case the Court held that only the financial circumstances in the relevant year could be taken into account under clause 39. 
It is the submission of Counsel that the Bartrom Estate case is directly on point and pertains specifically to any discretion allowed pursuant to s 15. 
Discussion and Analysis 
With respect to the exercise of attaining any weekly earnings I accept that the starting point in respect to the matter before the Court is the application of clause 39 of the First Schedule. 
Having established that Mr Rusher was a shareholder-employee in the year when the incapacity occurred it is accepted that the formula under clause 39(2)(a) must be accepted as the only possible option. 
This is because Mr Rusher is a claimant who first commenced receiving earnings as a shareholder-employee in the tax year in which the incapacity commenced i.e. December 2012. 
The formula accordingly to apply under s 39(2)(a) is a/b. 
.In terms of the formula “a” represents the amount of the total of the claimant's earning as an employee in the 52 weeks immediately before the incapacity occurred and “b” is the number of full or part weeks during which the claimant earned these earnings as an employee. 
It is now accepted that Mr Rusher was not an employee any time in the 52 weeks before the incapacity occurred. Accordingly the total income in those preceding 52 weeks as an employee must be nil and the total weeks also nil. 
It is accepted on the facts that Mr Rusher was not a shareholder-employee in the previous tax year (unlike the Bartrom case). Thus Counsel for Mr Rusher is incorrect as to Bartrom Estate case applying s 15“any given tax year” and was only exercised in “the relevant year”
Clause 39 does not make any reference to s 15 having any role in establishing the formulae for assuming a default position. 
Clearly the Court must rely on the plain wording of the sections. 
As has been referred to in submissions of Counsel for the Corporation, the decision of ACC v Bridges3
| X |Footnote: 3
AP 3110/99 
the Court recognised at paragraph [13]: 
“We are unable to accept arguments for the respondent to a different effect. It is of course true that the general intention of the scheme and legislation is to confer real compensation, but that is subject to specific provisions such as are principally in issue. The Court cannot rewrite the Act on the basis of perceived inadequacies in that respect or perceived injustices, if indeed such exist. That is for the legislature. As has been seen, we do not see the approach through s 42 as allowing, let alone inviting, a different interpretation of s 40 in a manner favouring the appellant. To the contrary it leads to a more restrictive approach. ”
The decision of Accident Rehabilitation and Compensation Insurance v Tarr4
| X |Footnote: 4
[1996] 2 NZLR 715, the full Court of the High Court held at 721 
“It is not for the courts to resolve problems or injustices which flow from the plain language of the legislation. It is for the legislature, if it sees fit, to amend the legislation so it achieves the results desired by the legislature. ”
This dicta is directly on point as to the application of the Court in these proceedings to rely on the plain language. 
In respect to “fairness”, and while the Act is a scheme for compensating workers for loss of earnings, the wording of the Act must be applied and the Court's role is not to probe for alternatives. 
For the reasons as set out above the appeal is allowed. The review decision of 10 March 2014 is quashed and the weekly compensation assessment issued on 10 October 2013 is to be reinstated. 
If the appellant is wishing to pursue costs and there is no agreement reached the appellant is to file submissions within 14 days of this decision and the respondent is to file in reply within a further 14 days. Submissions are then to be referred to me in chambers for a decision. 

[2008] NZACC 2010 
[2010] NZACC 72 
AP 3110/99 
[1996] 2 NZLR 715, the full Court of the High Court held at 721 

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